OAS faces big changes

When I picked up the Jan. 27 issue of The Globe and Mail, I thought for a moment I was reading excerpts from my new book. On the front page, the headline story said the Prime Minister plans to increase the age for drawing Old Age Security benefits. Over in the business section, the top story was about Canada’s seniors getting “punch drunk” on debt.

I knew that these things were going to happen. I just didn’t expect them quite so soon.

Let’s focus on OAS. In his wide-ranging speech to the World Economic Forum in Davos, Switzerland last month, Mr. Harper warned of the challenges that his and future governments will face due to the aging population. Demographic shifts will pose a threat “to the social programs and services that Canadians cherish,” he warned, saying that he intends to introduce a number of changes that will make the system sustainable going forward.

Although he did not mention OAS in particular, media reports immediately zeroed in on the program as a primary target. That speculation was almost certainly fuelled by background briefings from government staffers. It’s clear that we are being prepared for a major shift in government policy that would save billions of dollars by raising the age limit for drawing OAS.

Old Age Security is an obvious target because it is paid for directly from general revenue, unlike the Canada Pension Plan which is funded by invested contributions from employers and employees. In my book, Retirement’s Harsh New Realities, I point out that the cost of OAS payments increased more than 33 per cent between 2000 and 2007 to $31.8 billion. A recent actuarial report for the federal government projects another 32 per cent increase between 2010 and 2015 and predicts that if nothing is done the annual cost will hit $108 billion by 2030.

If Mr. Harper gets his way, that won’t happen. But get ready for a hell of a battle. We’ve already seen people take to the streets in Europe over government changes to what are perceived to be pension entitlements. We’re not likely to go that far in Canada, but the rhetoric will get quite vitriolic at times. Attempts by both the Mulroney and Chretien governments to change the system were both abandoned in the face of fierce opposition.

What is Ottawa likely to propose? First, they will move to increase the age at which people can start drawing OAS, probably to 67 from the current 65. The U.S. has already gone down that road on a phased basis with its Social Security system. Starting with people born in 1938 and later, the so-called “normal retirement age” gradually goes up until it reaches 67 for anyone born after 1959. That is likely just a first step. Already, there are proposals in Washington that the age should be increased to 68 for younger people. Ultimately, it may settle at 70.

Second, Ottawa could scale back the generous indexing provisions in Old Age Security. Right now, payments are fully indexed to inflation and adjusted quarterly. Reverting to annual indexing, like the CPP, would save millions of dollars immediately. Reducing cost-of-living indexing is also on the table in Washington — it was a proposal made in 2010 by a special committee appointed by President Obama to look at burgeoning Social Security costs. The President hasn’t endorsed the idea and won’t say anything about it in the run-up to this fall’s election. But if he is returned to the White House for another four years, don’t be surprised to see the idea sent to Congress to debate.

Finally, Mr. Harper could revisit the OAS clawback, which is extremely unpopular with higher-income seniors. As currently structured, a 15 per cent surtax is applied to OAS benefits received by anyone with net income higher than $69,562. The threshold is increased each year through indexing. When the clawback was originally introduced by the government of Brian Mulroney there was no indexing provision. That was introduced later by the Liberal government of Jean Chretien. Ottawa could recoup a lot more OAS money over time by eliminating clawback indexing again and the temptation must be strong to do so.

The U.S. experience will serve as both a model and a precedent for Mr. Harper and he will undoubtedly use it extensively in making his case to the Canadian public for rewriting the OAS rule book. Watch for the NDP and the Liberals to oppose any changes with all the firepower at their disposal. But since the Conservatives have a majority government, they should be able to push through the legislation, especially if the plan protects those closest to retirement age from taking a hit.

What this means in terms of retirement planning is that younger people will have to look at finding an additional $6,100 a year in inflation-adjusted income between 65 and 67, based on the average OAS pension paid in the fall of 2011. Either that or they will have to reduce their standard of living or delay retirement.

It’s not a desirable outcome but it’s just one more of the harsh realities we’re facing.

Gordon Pape’s new book, Retirement’s Harsh New Realities, is now on The Globe and Mail‘s best-seller list. Save 50 per cent by ordering your copy today.

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